Ford, GM may qualify for higher credit ratings
Thursday, October 6, 2011
NEW YORK (AP) — Detroit’s biggest carmakers have their labor costs under control thanks to new contracts. Now they’re hoping to lower the cost of their debt.
Ford and GM have agreed to new four-year labor contracts that could save them money. Under the contracts, they won’t have to pay annual raises to U.S. factory workers and they’ll hire thousands of new ones at lower wages. That could mean more money for investment and repayment of debt.
Agencies that rate the credit worthiness of companies like Ford and GM are putting investors on notice that the two automakers could get an “upgrade” in debt ratings, potentially lowering their cost for borrowing.
Moody’s Investors Service said Wednesday that it’s reviewing its ratings for Ford Motor Co., after the Dearborn, Mich., automaker reached a deal with the United Auto Workers for a new four-year contract.
The automaker’s ratings under review include “Ba2” for corporate family and probability of default, and “Ba3” for senior unsecured debt, both of which are so-called junk status. They also include “Baa3” for secured bank debt, the lowest level of investment grade.
Investment grade debt ratings allow companies to borrow money at lower interest rates.
“Ford has built a much stronger operating model and financial profile during the past year,” Bruce Clark, a senior vice president at Moody’s, said in a statement. “We want to determine if it can maintain this position if market conditions become more difficult.”
Under agreements struck with Ford and GM, most of the companies’ factory workers will get profit-sharing checks instead of annual raises. They’ll also get a signing bonus. In turn, the automakers will increase their workforces and invest billions more in their factories.
Moody’s said that assuming Ford’s contract is approved, the automaker’s operating flexibility, fixed-cost position, breakeven point, and cash position should stay near current levels.
An upgrade would put Ford closer to overall investment-grade status, which the automaker has said is one of its top goals. About $55 billion of debt would be affected.
Moody’s is already reviewing its ratings for General Motors Co., after the Detroit-based automaker’s workers ratified a similar contract last week. The credit rating agency said the reviews will look at GM and Ford side-by-side and will likely conclude at the same time.
Meanwhile, officials for Standard & Poor’s told analysts at a conference Tuesday that they still plan to raise Ford’s corporate rating from “BB-” to “BB+” after the pact is ratified. That would mirror the action S&P took with its ratings for GM a day after workers there approved a similar contract.
“The economics of the contracts are what drive the upgrade,” Robert Schulz, S&P managing director, told analysts Tuesday. “The contracts will allow them to continue their plans for the next four years.”
“BB+” is S&P’s highest speculative grade rating. The next step would be “BBB-,” which is the agency’s lowest investment-grade rating.
Ford shares rose 48 cents, or 4.8 percent, to close at $10.56, while GM shares rose 85 cents, or 4 percent, to close at $22.27.
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